Autor: Stefan Markus Kremeth

Dear Ladies and Gentlemen

Investment managers are strange animals, at least sometimes.

The amount of investment strategies out there is almost unlimited, and yet it seems only some of them are working. One of the most important decisions when choosing an investment manager is to understand the proposed investment strategy. Only when the investment strategy is well understood, one should choose to invest. An investment strategy that is difficult to understand may indeed deliver excellent results, but it may, unfortunately, deliver catastrophic results as well. The critical thing is to understand the strategy in order to avoid disappointment.

Usually, regulated investment managers can not derive from their proposed investment strategies without creating regulatory issues, i.e. an investment manager proposing to invest in Indian equities may not suddenly invest in Polish government bonds, even if Polish government bonds would go up in price like there was no tomorrow, Indian equities investment manager would still not be allowed to invest in them. The regulator wants to protect the average investor by forcing investment managers to deliver a product following its label

Now, if an investor seeks growth investments and after some years is disappointed to find out that the investments do not yield any cash returns, the investment strategy is probably not well chosen. Alternatively, if on the other hand, an investor invests in a cash return strategy and after some years is disappointed to find out that the strategy did not deliver any „growth“, again, the investment strategy is probably not very well-chosen.

Investment managers, therefore, may seem very stubborn at times and yet they cannot derive from the proposed strategy for regulatory reasons.

Investors sometimes compare apples with pears or growth with cash-flow strategies or Japanese equity funds with American equity funds, and this, of course, may lead to all sorts of disappointment. It is a little like buying a pickup truck and after some time being disappointed because on a race track sports cars produce better performance-results.

In addition, I believe there are not many people in the world who are good enough at making money from stock trading, because trading is a short term strategy that involves much guessing and as probably not many people can foresee the future, trading does not seem a viable strategy to most investment managers. Nevertheless, I sincerely believe there are a fair amount of money managers who can implement a proposed strategy and make money from investing if financial markets support the proposed strategy. What does this mean? If a money manager proposes an investment strategy in equities of oil-producing companies, the strategy can most probably not make any money in a period of decreasing oil prices, however, if oil prices shoot through the roof, the strategy of investing in equities of oil-producing companies has a fair chance to yield exceptional returns.

Last but not least, please do not get too excited about experts‘ views on TV (CNN, CNBC, etc). So-called experts who present their strategies in the media usually only get airtime because their strategies are working at the moment or in other words, financial markets support their proposed strategies for some time. As soon as the wind shifts, however, they disappear from the public eye until their investment approach once again matches the current market situation some years down the road.

Now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Many thanks for all the inspiring and challenging messages I received to my last weekly mail. The topic „fear of inflation“ indeed triggered a lot of comments, and I apologize for the somewhat delayed answering to some of them, as I was overwhelmed by the sheer number of emails I had received. Many thanks for your active participation!

A fair number of the mails I had received covered the question and interpretation of a definition of inflation. If I look at the concept of inflation, I am not so much concerned if inflation should be called inflation because a country’s monetary base is getting inflated (the „Austrian“ view) or if prices of a basket containing all sorts of goods move up (the „Keynesian“ view). These definitions (to some, they become almost religious in character) are superfluous for broad sections of the population and are usually depending on individual perspectives and defending one, or the other therefore is mostly an unnecessary loss of time. To me, the ultimate variable in the equation of inflation is the answer to how much money the average citizen (consumer) has in his pocket and what the purchasing power of that money is. Because this is what is relevant to the average person in the street.

Moreover, because I think that way, Ladies and Gentlemen, to me, the perception of inflation is a highly relative measure, depending on cultural backgrounds, socio-cultural backgrounds, age, country of citizenship, health status, and more. Let me elaborate.

The statistical inflation number per country is generally calculated with the help of a basket of goods – naturally that basket of goods changes (sometimes more sometimes less) from country to country, according to what the country’s economists think should belong in the basket and therefore be part of the inflation measure. The content of those baskets tends to change over time to adapt the shopping basket to changes in the shopping behaviour of a population. Some people would argue that because the content of the shopping basket changes, a long-term measure is complicated, and there are even people who claim, the changes in the shopping basket are executed only to replace products that go up in price a lot with products that show no to little price increase and thus serve to manipulate official inflation numbers.

Because I do not want to get into that discussion, and just for fun, I prefer to calculate my very own and individual inflation number by putting together my shopping basket with the ten products that are most relevant for our household and together cause the highest costs in our household budget. Thanks to Excel, this is quite an easy task. In my case, for example, housing has become cheaper over the last twenty years, because interest rates went down and as a consequence mortgage cost went down continuously as well, while for people who rent their house or apartment in most cases (a least in Switzerland) cost for housing has gone up. Again, the perception of inflation may change from country to country, but also from household to household.

One last thing I want to touch concerning inflation is the increase in some asset prices. Asset price inflation is real, and I firmly believe it will not stop as long as governments and central banks continue to pour liquidity into the economy. As a consequence, this will most probably lead to an even larger gap between asset owners and people who do not own such assets, and if now we want to somewhat philosophically speculate about further consequences, I think this has the potential to lead to some political unrest eventually.

I am looking forward to your comments!

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

I hope you all had an inspiring summer and were able to relax and decompress from what for many was a challenging first half of 2020.
I did enjoy a vacation in Switzerland, at home, working in the garden, reading, cooking (I started experimenting with vegan recipes) and playing golf. The weather in Switzerland was beautiful and not travelling for once during vacation time was o.k. However, I must admit that I missed at times the feeling of diving into a different cultural environment and I hope and am confident to enjoy this again in the not so distant future.

Now, today’s weekly, I would like to dedicate on the topic of inflation. It almost seems inflation is mentioned by the media, banks and in all sorts of publications in an „inflationary“ manner. While there seems to be plenty of noise on the effects of inflation, the cause of it does not seem to receive the same attention. At times one may get the impression the cause of inflation is purposefully swiped under the carpet as not to dampen the fear caused by concentrating on the terrible effects of inflation.

Well, since this fear of inflation may lead to misallocation of capital, I felt this was an exciting topic to start with after vacation time.

Ladies and Gentlemen, in a very simplified way, inflation may arise in a few ways and is generally defined by a widespread and continuous increase in prices for products and services, resulting in a fall in the purchasing value of money.

Possible ways inflation begins with are expanding money supply together with increasing speed of money circulation, demand-pull inflation, and cost-push inflation. You may come across various other terms and definitions, but in essence, this is what inflation is all about, and of course, one may experience any combination of the ways just mentioned.

For the last decades, the monetary bases in all (but not only) advanced economies increased massively. The great financial crisis and now the Covid-19 pandemic were only the most recent and extreme examples, but even before and in between these crises, monetary bases in advanced economies grew steadily. Nevertheless, there was no spike in inflation. How is that possible you may ask? The reason for it may be found in the slow speed of money circulation. Even if the money was there, it was not used, spent rapidly enough to create inflationary pressure.

There was no demand-pull inflation either. (Demand-pull inflation arises when demand for goods and services exceeds the corresponding supply over a long period), nor was there any cost-push inflation. (Cost-push inflation arises with increasing production costs, primarily increases in personnel costs/incidental wage costs (wage-push inflation), energy and/or increasing prices of raw materials, or interest rate increases).

But why on earth do we read about all those potentially terrible effects of inflation, if over the last decades inflation was by no means excessive? I guess it is because of the fear of a sudden increase in the speed of money circulation. This indeed could trigger higher inflation.

The question is probably how likely this is going to happen, and in this respect, it probably makes sense to think in scenarios. If you believe in a scenario with a deep recession and increasing unemployment and continuous low-interest rates, the speed of money circulation will most probably not go up. If, however, you believe in a substantial economic recovery, full employment, prosperity for everyone, increasing interest rates, a de-saving effect may lead to an increase in the speed of money circulation and inflation may go up.

I still believe in such a scenario like in any other, central banks would in a coordinated manner, fight inflation as much as possible, trying to control the yield curve.

If you vaguely agree with one of my scenarios (and there are many more than the two simplified ones I just mentioned), I think you will agree that a scenario in which we are facing a recession with increasing unemployment and continuous low-interest rates nevertheless leading to higher inflation is hard to imagine, no?

I am looking forward to your comments!

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Many thanks for your messages on my weekly mail on crude oil. I received many positive feedbacks. Thank you very much.

However, my old friend Mark noticed a mistake. I wrote: „Venezuela’s daily production stands at roughly 600 million barrels per day, while in 2017 they were producing 1.9 million on average per day“. This, of course, should have read: „Venezuela’s daily production stands at roughly 600 thousand barrels per day, while in 2017 they were producing 1.9 million on average per day“.

Please accept my apologies.

Ladies and Gentlemen, I will mostly be on vacation for the next two weeks. I will not go away but stay at home, and I will answer my emails but I will not write my weekly emails. The next regular weekly mail will, therefore, be published on August 7, 2020.

Thank you for your understanding!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, a great summer, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Energy prices are an essential pillar in any economy. I am generally interested in energy prices as such; today, however, I would like to focus on crude oil and on what can be expected on the crude oil price front over the next 12 – 24 months. Crude oil’s price development, directly and indirectly, touches on almost any area of daily life. As mentioned in my last weekly mail, my friend Robert made me aware of what looks like a market misconception to me. You may ask what this misconception is all about and I am happy to elaborate on it briefly.

The crude oil market is currently looking at a significant imbalance between supply and demand. The current surplus in storage, i.e. excess inventories, amounts to roughly 180 million barrels.

A balanced market is vital to OPEC members and other oil-producing countries. However, what exactly is a balanced market, i.e. a market equilibrium?

Economically speaking market equilibrium is reached when there is a perfect balance between supply and demand, which means eliminating any sort of surplus or any sort of shortage in a given product. When it comes to crude oil in the current business environment, OPEC and its friends are therefore looking at eliminating existing surpluses. The question is whether this is feasible. For that, I would like to quickly look back at recent history and at what had happened during the last crude oil crises in 2017.

In 2017 OPEC plus some other oil-producing countries (OPEC+) were able to reduce excess inventories of 152 million barrels in about ten months. This was very fast, indeed. But then in 2017, there were no lockdowns reducing economic activity, as we had painfully experienced in H1 2020.

How was it possible to reduce inventory so fast in 2017? The OPEC+ countries were cutting overall production, as they are doing today and they were cutting exports to the U.S., who at the time was increasing its oil production by roughly 1.2 million barrels per day from 8.7 million barrels at the beginning of 2017 to 9.9 million barrels at the end of 2017. Due to daily U.S. oil consumption of 18.9 million barrels per day and despite the production increase, the U.S. consumers (private and industry) were still „helping“ to reduce excess inventory by a hefty 120 million barrels in more or less ten months.

Now today, U.S. oil production is going down by at least 1.8 million barrels per day. At the beginning of the year, production stood at 12.9 million barrels per day, reached its high in March 2020 of 13.1 and stands now at 11 million barrels per day. Consumption, however, is expected to come in only slightly below last year’s 19.4 million barrels per day for the full year.

Furthermore, Lybia produces currently roughly 40’000 barrels per day, while they were producing almost 1 million barrels per day in 2017, Venezuela’s daily production stands at roughly 600 million barrels, while in 2017 they were producing 1.9 million in average per day and Iran’s exports are half of what they were in 2017. The Iraqi production again is way less than in 2017. I assume these supply-side issues will help OPEC+ to reduce the surplus.

Now, China’s consumption is expected to go down for the full year with a slump during the first and beginning of the second quarter and a steep recovery in H2. Global demand for the full year is expected to go down by some 2.5 million barrels per day for the full year, which is less than many analysts expected in April of 2020.

Ladies and Gentlemen, in addition to all of this, the low crude oil prices will lead to a significant reduction in CAPEX-investing and maintenance by oil producers, and this again will most probably lead to lower output and maybe even closures of oil wells.

What is my conclusion? I believe we will see higher crude oil prices in 12  – 24 months from now, as inventory levels will decrease drastically in H2 2020.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Inertia is a tendency of doing nothing or remain unchanged. It can be synonymously used with words like inactivity, passivity or inaction. In most cases, inertia is terrible. We can find inertia everywhere also in the financial industry.

Inertia in the financial industry may lead to severely insufficient returns. I am very much convinced that increasing regulation favours inertia. Why may you ask? The reason is that regulation limits many participants in the financial industry and especially investment managers and analysts to speak out what they think is best. When investment managers, analysts or investment management firms risk their job or their license, they will tend not to do what they think is best for investors/clients but rather what is best to avoid complication with investors/clients or in other words they will do close to nothing and become inert. Today in any financial company, any new product and any new investment advice need to be checked by compliance and risk management before bringing it to the market. Not as you may think to prevent investors from losing money but to ensure that if an investor loses money, the investment manager, analyst or financial firm cannot be held reliable. In order not to risk any breach of the regulatory framework, potentially leading to sanctions, fines, etc. by the regulator, investment managers play it safe and do not act even if they would love to act.

Excessive regulation may lead to excessive risk aversion. However, in times of an adverse risk-free rate of return, negative interest rates on government bonds, positive return can only be achieved by embracing risk. My partner and old friend Dr Christian Schärer always says, there is no „good“ or „bad“ risk there is only well- or mispriced risk.

The concept of receiving return without taking a risk is unfortunately not available, especially not in a negative interest environment. It never really was available, even if the term „risk free return“ in investment management theory is widely spread. The term is just a term and an essential pillar in theory itself, which the name suggests, is a theory. You know, Ladies and Gentlemen, in most periods over the past decades inflation was higher than the so-called risk-free (interest) return, which means in real terms investors would receive interest on their investment, true (and mostly be happy about it). However, they would give away more than that interest to inflation, without even noticing it and like this lose money (without noticing it) in real terms to the system, i.e. governments who were financing their debt, which in real terms became less and less. This happened mainly unnoticed by the general public.

Ladies and Gentlemen, I hope Brexit will lead to some deregulation of the U.K. financial industry, which then may affect other jurisdictions. This is a long shot, I am aware of that, but I am hopeful! Next week we will have a closer look at crude oil. I sense some misconception and am happy to share interesting information that was brought forward by my friend Robert.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li

Dear Ladies and Gentlemen

Thank you very much for all your positive feedback on the Oscar Wilde quote. I am happy you liked it.

Today I am asking myself: Are there any signs of inflation?

Currently, we cannot say so.

We do not see any significant increase in commodity futures prices. Especially on the energy front, it even looks as if energy will be produced at ever-lower prices in the coming years. And you know what, household incomes do not reflect any sharp increase in the price of goods as of yet either.

Ladies and Gentlemen, I know some of you might not like this, but since the 1980s, the relationship between monetary developments and inflation rate does no longer seem to show statistical significance. A correlation is not recognizable. Even if one were to argue with a shadow inflation rate, there would be no positive correlation. The deflationary pressures of globalization, due to technical progress and age-related demographics, have not dissolved. Moreover, I believe these factors will remain for some time, still.

Besides, the composition of the shopping basket used for statistical purposes has continuously changed over the past 50 years. While the share of services was increased, the share of goods was decreased. Therefore, rises in wages and salaries in the service sector should lead to a more significant impact on the inflation rate than before, and yet, we can not see that. Anyway, I think you would agree an increase in inflation rates in the course of economic recovery would be somewhat healthy.

Today we do not assume hyperinflation, especially not in the case of a recession and not on a global basis.

I am interested in getting to know your views, Ladies, and Gentlemen!

Every week I am receiving emails from readers asking me about our portfolio mix. It is still the same, roughly 50% in equities and roughly 30% in cash. We are considering an increase in the equity portion over summer. Interestingly, I just read in a research paper that the bullish expectations of U.S. private investors (measured by AAII) fell from 24.4% to 24.1%. This shows that private investors remain very cautious. I keep telling our investors that as a rule of thumb, a rise in the markets only ends when private investors have also returned to the markets and become bullish. For this, we would have to see significantly more than 50% of private investors turning bullish.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to: smk@incrementum.li

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Central Banks are doing everything to avoid economic calamities, and I am not necessarily against it. However, now it seems we are entering an entirely new phase of central bank intervention in financial markets.

Central banks are now buying corporate bonds directly in the markets. While this may seem not worth mentioning to some investors, it is rather noteworthy to me. Why? Is this going to have any sort of impact you may ask? Well, to tell you the truth, to me, this is quite a mind-boggling exercise because market forces are getting subdued more and more and on multiple levels. For example, in today’s ultra-low interest environment, one may find plenty of corporate bonds of fine companies yielding zero or (slightly) negative returns. If central banks are buying those corporate bonds, it is going to be market-distorting and effectively means, interest rates will go down even more, and those companies will not only not have to pay interest on their debt but on the contrary, will receive interest from some friendly central banks for taking up dept.

Moreover, and of course, such market interference favours fine, large, multinational companies with healthy balance sheets, and it will quite likely lead to higher concentration rather than to higher diversification. Smaller players will disappear while more significant players will become even more powerful and more significant, as they may generate interest income for taking up debt, use the money to buy up or squeeze out their competition and increase their (pricing and everything else) power.

Eventually, this increasing power may be felt by consumers and employees alike „Amazon“-like business behaviour creates wealth for a very few and not necessarily for the masses.

Ladies and Gentlemen, wealth for some very few and nothing for the masses are what in the end led to the (French – but not only) revolution. Can we still control what is happening, or is it spinning out of control? What will the result look like? What is our political leaders‘ vision?

Oscar Wilde once said: „Everything is going to be fine in the end; if it is not fine; it is not the end.“  Is what is happening today fine for large parts of our global population?

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Some new participants joined our year-end competition last week. This is perfect. Thank you very much.

After the massive rally, we have seen since the March lows, many of my readers ask me what I am expecting for the next months. Those who read my weeklies for a longer time know that I’m not particularly eager to make predictions, and yet, I get involved in a year-end competition you may think. Well, the year-end competition is for fun, and I am happy to distribute a silver coin once a year. Market predictions are a different ball game.

I cannot foresee the future, nor can anybody else. However, anyone working in the financial industry and managing assets must have at least a loose idea of where markets could be heading, and this is why I am in general, working with scenarios.

Now, what I find quite extraordinary during this crisis is the fact that market direction may change very rapidly and extensively. Two months ago, only very few people could imagine markets going up to current levels in such a short time frame. There was hardly any expert who was not seriously concerned, not to mention the media. Interestingly enough, in the last two weeks or so all of a sudden, some experts turned positive, and the press started to come up with positive market news.

But why can stock markets go up while there are increasing numbers of people losing their jobs and queuing for food?

Let me give you what I think could be a possible explanation. While average citizens may experience negative economic impacts in their life at this very moment, many institutional investors, i.e., institutional (professional) stock market participants, are already looking into 2021. Now those institutional investors see the world from a slightly different perspective. They acknowledge that politics and central banks have tied up rescue packages as quickly and comprehensively as never before, they are seeing lockdowns being lifted, consumption rebounding very slowly and yet surely, travel restarting very slowly and yet surely as well and a recession that is going to be over eventually and at the same time, they see remaining stimuli for years to come, leading to an overflow of liquidity.

…or as the CIO of a global financial institution casually mentioned this week: „the world is swimming in cash!“

That sort of liquidity will seek its way to the highest proposed returns, which due to low-interest rates, most probably will be found in equities rather than in bonds.

Ladies and Gentlemen, this is highly simplified, and of course, I don’t have a crystal ball, and of course, I can’t foresee the future, but to me, this seems like a valid explanation for what we have seen in the markets ever since March and what we might experience in the months to come.

As always, please feel free to share your ideas and thoughts to me, but please don’t forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

And now, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li